As a property investor or anyone who owns real estate, it is wise to have insurance coverage. That insurance coverage protects you financially if something goes wrong, providing peace of mind and helping prevent financial ruin. There are a few things you should be aware of when looking for real estate or property insurance, including the types of insurance to consider.
Types of Insurance for Real Estate Investors
Not every real estate investor will need all types of insurance. For example, you do not need renter’s insurance or landlord insurance if you flip properties instead of renting them out. That being said, the following are the types of insurance you should at least consider if you have property investments.
- Builder’s Risk Insurance: If you plan to renovate a property, this policy protects you during construction. It may even cover loss of income from construction delays.
- Flood Insurance: Most hazard insurance does not include damage from floods, so you need a separate policy for it.
- General Contractor Insurance: This is another policy good for investors who plan renovations. You need this type of insurance if you handle general contracting yourself.
- Hazard Insurance: This is the usual insurance property owners or homeowners have, covering storms, theft, and fire. You can usually have additional coverage for a slightly higher fee.
- Liability Insurance: Liability insurance protects you if someone is injured or someone has their belongings damaged while on your property. This is important if you rent the property or hire people to work on it. It can even protect you against people wandering on your property during renovations and getting injured.
- Loss of Income Insurance: This is a crucial insurance coverage if you plan on renting out your investment property, as it makes up for the lost rent if your property is uninhabited due to specific circumstances.
- Rent Guarantee Insurance: Another insurance for property investors who rent out, this insurance protects you if tenants do not pay their rent.
- Rental Property Insurance: This type of policy, also called a landlord insurance policy, will typically bring together some rental-related insurance policies, like loss of income and liability.
- Workers’ Compensation Insurance: If you have any employees, you should consider workers’ compensation insurance to provide coverage if they are injured at work.
- Umbrella Insurance: Umbrella policies supplement other insurance policies, giving you extra coverage, either in terms of financial limits or covered circumstances.
Replacement Cost Vs. Actual Cash Value Policies
There are two main categories of insurance policies for properties: replacement cost policies and actual cash value policies. With actual cash value (ACV) policies, the coverage is just for the amount you spent on the property, not including the land. Expect insurers to offer this policy in case of older properties without major updates.
Ideally, you want to get a replacement cost policy whenever possible. This pays completely for any losses covered, other than your deductible. When necessary, these policies pay to rebuild the house completely. Your property will need to be in good condition to qualify.
Property investors should also be aware of coinsurance penalties. These apply if you are under market costs by 20% or more. An example would be if you have a property that would require $400,000 if it needed to be rebuilt, but your insurance is less than $320,000, which is 80% of its value. With coinsurance policies, your payouts have the same percentage as the percent of market value your coverage is at.